As COVID-19 continues to damper the US economy, some investors are concerned that the safety found in Collateralized Loan Obligations (CLOs) are fleeting. The economic downturn had increased the risk of interest and principal payments being cut off for some of these investment-grade CLOs and the notes at risk have ratings as high as the A tier. While CLOs can withstand some economic pressure, some are worried that the economic outlook is far worse than CLOs were originally designed for. “I don’t know anybody that modeled a CLO, or any other structured product, around unemployment soaring from about 3% to the levels we could be facing in the next few weeks,” said Elen Callahan, SFA’s Head of Research. While safeguards designed to protect the least risky CLOS, called senior over-collateralization tests, have been activated, others worry that more deals could meet the same fate in a few months.
Read more via Bloomberg here.